Assessment of Income Tax Expenditures in Pakistan

ASSESSMENT OF INCOME TAX EXPENDITURES ASSESSMENT OF INCOME TAX EXPENDITURES IN PAKISTAN By Bilal Hassan1 In recent times, tax expenditures have widely been criticized as ineffective and inefficient policy instruments,-lobbying by special interest groups in Pakistan. In this article, the author reviews the economic situation of Pakistan and revisits the structure of income tax law with a focus on income tax expenditures over the period of 2007/08 to 2011/12. After presenting major beneficiaries of tax exemptions, reduced tax rates and reduced tax liability under the income tax code, tax expenditures are discussed from tax policy and economic efficiency point of view. In conclusion, income tax expenditures are proved to be an important contributing factor to lower tax-to-GDP ratio, enhancing tax evasion, promoting horizontal inequalities and causing economic inefficiency in Pakistan and therefore, require to be rationalized, in particular in the wake of increasing budget deficits. 1. Introduction Pakistan has been facing serious economic problems since 2007/08 as the fiscal deficits are ballooning and the tax revenues as percent of GDP are more or less stagnating. In 2011/12, the fiscal deficit was 8.6%, ever highest since 1960s2. Consequent upon, the State Bank of Pakistan (SBP) has issued warning that this fiscal deficit is not sustainable and can push the country towards a debt trap as the public debt-to-GDP ratio has reached 62.6% in 2011/12.3 Federal tax revenue remains the most important source for the government to balance the budget. However, tax revenue collection fell short of targets every year, lead to higher budget deficit. For instance, against the target of PKR 1951.7 billion for 2011/12, the Federal Board of Revenue (FBR) collected PKR 188r.5 billion, indicated a shortfall of PKR 70.2 billion. Sources of federal tax revenue include income tax, sales tax, federal excise duty and customs duty. The tax-to-GDP ratio was 9.1% in 2011/12, which was improved from 8.6% in the previous year. However, Pakistan tax-to GDP ratio is lowest among similar economies of the world and is attributable to many reasons. One most important reason is the loss of tax revenue mainly caused by "tax expenditures" (exemptions, concessions, reduced rates). For instance, the amount of tax exemptions exceeded the loans acquired from International Monetary Fund (IMF) over the period of 2007/08 to 2011/12, as the government took loans of PKR 604 billion from the IMF and granted tax exemptions amounting to PKR 719 billion.4 In recent times, tax expenditures have widely been criticized as ineffective and inefficient policy instruments, lobbying by special interest groups in Pakistan. The estimated loss of revenue due to income tax and sales tax expenditures was PKR 298.046 billion between 2008/09 to 2011/12. Loss of revenue due to waiver off customs duty through the Statutory Regulatory Orders (SROs) stood at PKR 420.72 billion during that period. So whopping exemptions gives rise to the question of who are the main beneficiaries of those exemptions and what are the effects of the exemptions on the economy. 2. Major Income Tax Expenditures in Pakistan Income tax code of Pakistan provides a list of incomes, which either has been exempted fully from tax or subject to concessional tax rates5. In addition, there are taxpayers whose tax liability is reduced under the income tax code. Moreover, certain incomes are exempt from the operation of specified provision of the income tax law. The cost of exemptions, exclusions, subtractions, deductions, rebates and credits etc., under the income tax code is presented in table 1. The average annual loss of income tax revenue on account of income tax expenditures over the period of 2007/08 to 2011/12 has been estimated at PKR 46.163 billion with a peak of PKR 69.608 billion in 2011/12. Table-1: Income Tax Expenditures for the period of 2007/2008 to 2011/12 (PKR in Billion) Tax Expenditure Items 2007/08 2008/09 2009/10 2010/11 2011/12 Pensions and Gratuity 0.390 0.054 0.075 0.087 0.171 Income from Funds, Boards of Education, Universities and Computer institutes etc. 0.220 0.828 0.950 0.979 6.077 Donations and Contributions to Charitable Organizations 1.740 0.517 0.630 0.649 0.624 Independent Power Producers 4.700 0.722 0.852 0.870 46.939 Income from certain Trusts, Welfare and Charitable Institutions and Non-Profit Organizations 0.920 1.050 1.350 1.360 0.205 Profits on Debt/interest from government securities and certain foreign currency accounts/books, Profit on debt earned by certain non-resident individuals and institutions 0.210 0.025 0.050 0.049 1.461 Export of Information Technology 0.030 0.602 0.812 0.724 0.822 Capital Gains 18.480 18.760 21.910 21.840 2.108 Other Sectors/enterprise specific exemptions 0.970 17.897 19.905 19.950 11.201 Total 27.660 40.455 46.534 46.508 69.608 % of total tax revenue 2.7 3.5 3.5 3.0 3.7 % of income tax revenue 7.5 9.6 9.4 8.1 9.7 % of GDP 0.27 0.32 0.31 0.26 0.34 Source: Economic Surveys of Pakistan 2007/08 to 2011/12, available at http://www.finance.gov.pk/survey_0809.html 2. Beneficiaries of full Exemptions The following are the beneficiaries whose incomes are fully exempt from tax. Recipient of Pensions and Gratuity6 any citizen of Pakistan, members of armed forces of Pakistan or employees of the federal government or a provincial government, dependents of "Shaheeds", commutation of pension from government or under any pension scheme approved by the FBR, any amount received by a government employee on encashment of leave preparatory to retirement (LPR). Recipient of Income from Funds7 Any amount received by any person on account of provident fund, accumulated balance of recognised provident fund, benevolent fund, approved superannuation fund, and workers profit participation fund (WPPF) Boards of Education, Universities and Computer Institutes etc.8 Any income derived by the textbook boards, any university or other educational institutions established solely for educational purposes, any taxpayer from running of any computer training institute or computer training scheme, Vocational, technical or poly-technical institutes are exempt from tax for a period of five years. Charitable Organizations and Funds Any income of a religious or charitable institutions derived from voluntary contributions, and certain institutions, foundations, societies, boards, trusts and funds derived from donations.9 the Prime Minister's Special Fund for victims of terrorism, the Chief Minister's (Punjab) Relief Fund for Internally Displaced Persons (IDPs), the Prime Minister's Flood Relief Fund, 2010 and the Provincial Chief Ministers' relief funds for victims of flood 2010 derived from donations.10 Independent Power Producers Any profits and gains from an electric power generation project set up in Pakistan11 The Independent Power Producers (IPPs) were given whopping income tax exemptions worth PKR 46.939 billion in 2011/12, an increase of 5295.3% over the last year as the exemptions were worth PKR 0.870 billion in 2010/11. Certain Trusts, Welfare and Charitable Institutions and Non-Profit Organizations Any income derived from donations, voluntary contributions, subscriptions, house property, investment in securities of the federal government by a trust, welfare institutions or non-profit organizations. Non-resident Individuals and Institutions Profit on debt derived by: a non-resident person against an approved loan, Hub Power Company Limited on its bank deposits or accounts with financial institutions, a non-resident person in respect of the Islamic mode of financing including Istisna, Morabha, Musharika, an agency of foreign government, foreign national person (company, firm or AOP), or any other non-resident person approved by the federal government on moneys borrowed under a loan agreement or in respect of foreign currency instrument approved by the federal government. Recipient of Profits on Debt/interest from government securities and certain foreign currency accounts/books Profit on debt derived: from foreign currency account held with authorized bank Pakistan or certificates of investment issued by investment banks, from a rupee foreign currency account held with a scheduled bank in Pakistan by a Pakistani abroad, if the deposits are made from remittances from outside Pakistan, from private foreign currency account held with an authorized bank in Pakistan or certificate of investment issued by investment banks, by any person other than bank and financial institution on foreign currency bearer certificates on existing till the certificates are encashed, on special US Dollar Bonds, from Pak rupee account or certificate created by conversion of foreign currency accounts. Recipient of Income from Export of Information Technology12 Income from export of computer software or information technology (IT) services including software development, software maintenance, system integration, web design, Web development, web hosting, and network or IT enabled services including inbound or outbound call centres, medical transcription, remote monitor*, graphics design, accounting services, HR services, telemedicine centres, data entry operations, locally produced television programs, and insurance claims processing Recipient of Capital Gains Capital gains arising from sale of: Modaraba certificates, Redeemable certificates like Participation Term Certificates (PTCs), Term Finance Certificates (TFCs), Musharika Certificates, any other security not based on interest excluding shares, Pakistan Telecommunication Vouchers issued by the government of Pakistan, and shares of public company were exempt from income tax up to tax year 2010 (30 June, 2010. Any capital gain arising from the sale of shares of a public company, if shares have been sold by a foreign institutional investor approved by the federal government is permanently exempt from income tax.13 from the sale of shares of public company set up in any Special Industrial Zone is exempt from tax up to five years from the date of commencement of commercial production14 from the sale of shares of an industrial undertaking set up in Export Processing Zone is permanently exempt from income tax.15 Other Sectors/enterprises Income of certain other sectors and enterprises fully exempt from tax include: Any income derived by a company from foreign enterprise such as by way of royalty, commission or fee for consideration of usage of any patent, invention or other intangible property rights,16 Profits and gains of a taxpayer from an industrial undertaking are exempt from tax for a period of ten years starting from the later of the month in which it is set up or has commenced the commercial production.17 Salary income of the employees of certain organisations,18 Any allowance and perquisites paid by the government of Pakistan to a Pakistani appointed by the government in any foreign country, Income of National Investment (Unit) Trust19, Mutual Funds20, Modarban21 , Subsidy received by a person from the federal government, Any dividend received by the Investment Corporation of Pakistan (ICP) from any other company which has paid or will pay tax in respect of the profits out of which such dividends are paid, income of sports boards, Agriculture income22 Income of an individual entitled to privileges under the Diplomatic and Consular Privileges Act, 1972; or the United Nations (Privileges and Immunities) Act, 1948, Pensions income of a Pakistani received being an employee of United Nations or its specialized agencies including the international court of justice, salary income received by an employee from a foreign government, if such an employee is foreign national and not a citizen of Pakistan, any Pakistan source income for which Pakistan is not permitted to tax under a tax treaty, salary income of an individual performing services under an Aid Agreement, if he is foreign national and not a citizen of Pakistan, Income of a contractor, consultant or expert, if he is foreign national and not a citizen of Pakistan, any allowance attached to any honor, award or medal; or any monetary award granted to a person by the President of Pakistan, any profit on debt received by a non-resident person on security issued by a resident person,23 any scholarship granted to a person to meet the cost of the person's education, any income received by a spouse as support payment under an agreement to live apart, income of the federal government, a provincial government and a local authority, except income from business derived from a business carried on outside its jurisdiction, foreign-source income of short-term resident individual,24 However, the income of short-term resident is not exempt from tax if such income is derived from business established in Pakistan or any foreign source income has been brought into Pakistan or received in Pakistan, and foreign source income of a Pakistani returning back in Pakistan.25 Recipients of perquisites The following perquisites received by an employee by virtue of his employment are fully exempt from tax: free or concessional passage provided by transporters including airlines to their employees or family members or dependents of the employees, free or subsidized food provided by hotels and restaurants to its employees 'during duty hours, free or subsidized education provided by an educational institution to the children of its employees, free or subsidized medical treatment provided by a hospital or a clinic to its employees, any other perquisites or benefit for which the employer does not have to bear any marginal cost, as notified by the FBR. Any allowance received as flying allowance by pilots, flight engineers and navigators of the Pakistan Air Force, Pakistan Army and Pakistan Navy, Civil Aviation Authority or any Pakistani Airline. 4. Beneficiaries of Concessional Tax Rates The following incomes, if brought into Pakistan through normal banking channels, subject to one percent tax rate: Gross receipts from services rendered outside Pakistan, Gross receipts from construction contracts outside Pakistan, Importers of Goods The following goods subject to concessional withholding tax rates instead of 5% of import value required to be deducted under section 148 of the Income Tax Ordinance, 2001. 3% on import of raw material by industrial undertaking for its own use, 4% on import of edible oil and packing material, 1% on import of all fiber, yarn and fabrics and goods covered by the zero-rating regime of General Sales Tax Act, 1% on import of potassic fertilizers, 1% import of urea fertilizers, 1% on import of gold, mobile telephone sets, and silver, 2% on import of pulses, Non-Resident Person Rate of tax on payment from profit on debt to a non-resident having no permanent establishment (PE) in Pakistan is 10% on the gross amount paid. Certain Recipient of Dividends Rate of tax is reduced to 7.5% on dividends declared or distributed: by purchasers of a power project privatized by Water and Power Development Authority of Pakistan (WAPDA) and on shares of a company set up for power generation. Advertising Agents The rate of tax on payment of brokerage and commission is reduced to 5% from 10% for the advertising agents. Utility Store Corporation Rate of tax is 1% on the sale value of rice to be sold by the Rice Exporters Association of Pakistan (REAP) to utility store corporation. 5. Beneficiaries of reduced tax liability26 Tax liability of following taxpayers is to be reduced by: 50% in case age of a taxpayer is 60 years or more, 75% in case a taxpayer is full time teacher or researcher in a non-profit education or research institute, 80% of minimum tax payable under section 113 for a company engaged in the business of distribution of cigarettes manufactured in Pakistan, 80% of minimum tax payable under section 113 for distributors of pharmaceutical products, fertilizers, and consumer goods, 80% of minimum tax payable under section 113 for flour mills, importers of old and used automobile vehicles, etc. In addition, flying allowance by pilots, flight engineers, navigators of Pakistan Armed Forces, Pakistani Airlines, or Civil Aviation Authority, Junior Commissioned Officers or other ranks of Pakistan Armed Forces, and submarine allowance by the officers of Pakistan Navy is taxed at 2.5% as a separate block of income. 6. Tax Policy and Economic Considerations Tax Revenue Pakistan's tax-to-GDP ratio is low by international standards.27 The low and declining tax-to-GDP ratio is a matter of serious concern in the recent times, particularly when the fiscal deficits are increasing (Table 1). More importantly, the income tax (individual and corporate) as a share of GDP is also low by international standards and is declining as well. One important reason of low and declining share of income tax revenue is too many exemptions and concessions in the income tax code. The income tax base in Pakistan is alarmingly low due to large income tax exemptions and concessions. This package of exemptions and concessions acts to make Swiss cheese out of the income tax base for both individuals and Association of Persons (AOPs).28 The fiscal deficits over the period of 2007/08 to 2011/12 could be easily reduced, if the original targets for all federal taxes amounting to PKR 1,025 billion, PKR 1,250 billion, PKR 1,380 billion, PKR 1,667 billion and PKR 1,952 billion were fully achieved. On the other, the original tax targets could easily be achieved if the tax expenditures on account of federal taxes (income tax, sales tax, federal excise duty and customs duty) amounting to PKR 86.657 billion, PKR 119.646 billion, PKR 150.291 billion, PKR 175.211 billion and PKR 185.496 billion were rationalized through effective tax policy measures. Table-1: Fiscal Deficit, Tax-to-GDP Ratio and Income Tax-to-GDP Ratio Fiscal Deficit* Tax-to-GDP Net Income Tax‑to-GDP Year (% of GDP) Ratio Ratio 2002/03 3.7 9.4 3.0 2003/04 2.3 9.2 2.8 2004/05 3.3 9.1 2.7 2005/06 4.3 9.4 2.8 2006/07 4.4 9.8 3.6 2007/08 7.6 9.8 3.6 2008/09 5.3 9.1 3.3 2009/10 6.3 8.9 3.3 2010/11 5.9 8.6 3.1 2011/12 8.6 9.1 3.4 Source: *Economic Survey of Pakistan 2011/12. Own calculations from FBR Year Books Tax Avoidance and Tax Evasion29 The extensiveness of exemptions and special treatments provided for the income tax may create opportunities for tax avoidance and evasion.30 For instance, a taxpayer deriving income from agriculture as well from business may inflate agricultural income and reduce income from business at the time of filing tax return, in particular when economy is largely un-documented. Zaidi (2010) concluded that Pakistan's tax evasion problem is caused by three things: poor legal frameworks and bureaucratic capabilities with regard to revenue extraction; corruption in the form of a predatory class that privileges certain sectors and vested interests with unjustified tax "exemptions"; and elites who cut deals with the State to avoid taxation, made possible by an anaemic agriculture income tax (agriculture makes up 22 percent of Pakistan's GDP, but only 1 percent of its tax revenue).31 The extent of tax evasion can also be estimated from the fact that only 800,000 people pay taxes out of 180 million, only 0.5% of total population of Pakistan.32 As a result, income tax-GDP gap33 appears to be quite higher in Pakistan. Ahmed and Rider (2008) estimated the income tax-GDP gap for 2004/05 at PKR 262.8 billion or around 152% of the actual income tax revenue of PKR 172.5 billion. The income tax gap estimated on salaried individuals, non-salaried individuals and corporations was PKR 13 billion, PKR 7.3 billion and PKR 242.5 billion, respectively or around 97%, 15% and 217% of the actual income tax collection of PKR 26.3 billion, PKR 55.1 billion and PKR 353.9 billion, respectively.34 Moreover, such a scheme of exemptions discourages voluntary compliance under self-assessment system and businesses already filing tax returns may opt to avoid or even evade taxes. In Pakistan, since 2007/08 the number of income tax returns have decreased steadily from historic highest figure of 1.81 million in 2006/07 to currently 1.29 million in 2011/12, indicated a decline of 28.7% during this period (Table-2). Table-2: Trends in Income Tax Returns Year Income Tax Returns Increase/Decrease (Million) (%) 2003/04 1.03 2004/05 1.23 19.4 2005/06 1.49 21.1 2006/07 1.81 21.5 2007/08 1.57 -13.3 2008/09 1.72 9.6 2009/10 1.60 -7.0 2010/11 1.51 -5.6 2011/12 1.29 -14.6 Source: Own Collection from FBR Year Books, Quarterly Reviews, and newspapers' articles Horizontal Inequalities In case income of certain taxpayer is fully exempt from tax or subject to concessional tax rates, horizontal inequalities (taxpayers with the same income or tax base should pay equal taxes) are bound to increase. According Matinez-Vazquez (2006), there are two most important sources of horizontal inequalities: unequal treatment of taxpayers with same level of income through exemptions and the like and different opportunities of tax evasion.35 The unequal treatment of individuals with the same income arises because of the exemptions of some form of income, such as is the case of agricultural income and the case of capital gains from the sale of securities. Energy, Efficiency and Economic Growth Energy is considered to be the lifeline of economic development.36 Despite huge loss of income tax revenue in favour of IPPs in 2011/12, the country faced a record shortfall of both power (electricity), and natural gas in 2011/12.37 Electricity supply was inadequate to meet rising demand and the load shedding worsened as the country experienced a record peak shortfall in 2011/12. For instance, the peak shortfall for the Pakistan Electric Power Company (PEPCO) system increased from 2,645 Mega Watt in 2006/07 to 8,398 Mega Watt in 2011/12.38 Supply remains less than demand while on demand side, subsidized energy has reduced incentives for conservation, and has actually encouraged inefficient consumption.39 There is general consensus amongst economists that the tax exemptions and concessions make the income tax system unfair and non-neutral, thus lead to economic distortions and inefficiencies. This appears to be particularly true in the case of Pakistan because the income tax system does not provide level playing field for all economic agents and sectors of economy. Some economic agents or sectors are exempt from tax while others tend to be heavily taxed, and consequently the allocation of resources gets distorted. A neutral tax system does not interfere with the allocation of resources and, thus, does not disrupt the functioning of the market mechanism.40 Matinez-Vazquez (2006) concluded that the tax system of Pakistan leads to different marginal rates of effective taxation, which lead to significant distortions in investment decisions and a lower level of efficiency of the economy and slower rates of economic growth. Total investment has declined from 22.1% of GDP in 2007/08 to 12.5% of GDP in 2011/12. Fixed investment has decreased to 10.9% of GDP in 2011/12 from 20.5% of GDP in 2007/08. On the other, private investment witnessed a contraction of 7.9% in 2011/12 compared to 15% of GDP in 2007/08.41 The gross domestic product (GDP) growth also declined from 6.8% in 2006/07 to 3.7% in 2011/12. 7. Conclusion Since it has a considerable budget deficit and the lowest tax-to GDP ratio amongst many developing countries, Pakistan urgently needs to improve its financing situation. Since income tax expenditures erode the tax base and, hence, reduce overall tax revenues, eliminating income tax expenditures would help achieve an increase of the tax-to-GDP ratio from 8.9% in 2010/11 to 15% in 2014/15, as envisaged in the Seventh National Financial Commission (NFC)Award 2010.42 Elimination of the income tax exemptions that are exclusively to the benefit of inefficient producers and politically powerful lobbies would help make the income tax system fairer and more equitable and more competitive for all sectors of the economy, and it would have a positive effect on tax revenues in the sense the tax target of PKR 2,230 billion for 2012/13 will become achievable. In this context, it should be noted that, in many developing countries, tax expenditures are commonly used instruments for promoting economic growth, developing infrastructure, education and health care, and reducing poverty, etc.43 Therefore, only those tax expenditures, which are relevant for the actual needs of the country or its population, and those which should be effective and efficient44 in achieving the objectives of promoting economic growth and, as a result, raising tax revenues, are to be retained. _____________________________ 1. Bilal Hassan is working as a Deputy Director of Inland Revenue, Federal Board of Revenue, Pakistan. He is a graduate in Tax Policy and Management from Keio University, Japan. The opinions expressed in this article are the author's and do not represent the opinion or position of the Federal Board of Revenue of Pakistan or the Keio University. 2. See Chapter 6 "Fiscal Policy" of the annual report of State Bank of Pakistan 2011/12, available at http://www.sbp.org.pk/reports/annual/arFY12/ Fiscal_Policy.pdf (accessed on 31 January 2013). In 1960s, the fiscal deficit of Pakistan was 8.7%. 3. See Chapter 7 " Domestic Debt and External Debt" of the annual report of State Bank of Pakistan 2011/12, available at http://www.sbp.org.pk/reports/annual/ arFY12/Domestic_External_Debt.pdf. 4. See report "Tax Exemptions Surpasses IMF Loans" 29 January, 2013, available at http://dawn.com/2013/01/30/tax-exemption-surpasses-imf-loans/ (accessed on 1 February, 2013). 5. Section 53 of the Income Tax Ordinance, 2001 empowers the Federal Government to specify the incomes or classes of incomes, persons or classes of persons, which either be exempt from tax or whose tax liability shall be reduced. Part I of the Second Schedule to the Income Tax Ordinance, 2001 provides incomes, which are fully exempt from tax while Part II provides list of incomes, which subject to concessional tax rates. 6. See clauses (8), (9), (12), (13), (16) and (19) of the Second Schedule to the Income Tax Ordinance, 2001 as amended up to June 30, 2011. 7. See clauses (22), (23), (23A), (24), (25) and (26) Part I of the Second Schedule to the Income Tax Ordinance, 2001. 8. See clauses (91), (92), (92A), and (93A) Part I of the Second Schedule to the Income Tax Ordinance, 2001. 9. See clauses (60) and (61) Part I of the Second Schedule to the Income Tax Ordinance, 2001. 10. See clauses (64A), (64B), (64C) and (65) Part I of the Second Schedule to the Income Tax Ordinance, 2001. 11. To qualify for exemption, the project is set up on or after July 1, [Contd.] 1998, and is owned and managed by a company formed for operating such project and registered under the Companies Ordinance, 1984 and having its registered office in Pakistan. For details see Clause (132) Part I of the Second Schedule to the Income Tax Ordinance, 2001. 12. See clause (133) Part I of the Second Schedule to the Income Tax Ordinance 2001. 13. See clause (111) Part I of the Second Schedule to the Income Tax Ordinance, 2001 as omitted by the Finance Act, 2010. 14. See clause (113) Part I of the Second Schedule to the Income Tax Ordinance, 2001. 15. See clause (114) Part I of the Second Schedule to the Income Tax Ordinance, 2001. 16. The royalty, fee, etc. should be received from a foreign enterprise for technical services rendered outside Pakistan and the amount is received in Pakistan. For details, see Clause (131) Part I of the Second Schedule to the Income Tax Ordinance, 2001. 17. The exemption is allowed if the industrial undertaking is set up between January 1, 1995 and December 31, 2002; it is set up in such area as is notified by the Federal Government as a Special Industrial Zone; it is newly set up; owned and managed by a company formed exclusively for operating such industrial undertaking and registered under the Companies Ordinance, 1984 having its registered office in Pakistan; and must not engaged in the following businesses: (i) manufacturing of arms and ammunition; (ii) security printing, currency and mint; (iii) high explosives, radioactive substances; (iv) alcohol except industrial alcohol; (v) cotton ginning, spinning except as part of integrated textile unit; (vi) sugar manufacturing (white), flour milling; (vii) steel re-rolling and furnace; (viii) tobacco industry, ghee or vegetable oil industry; (ix) [Contd.] plastic bags including polypropylene and polyethylene; (x) beverages excluding fruit juices; and (xi) polyester industry, automobile assembly and cement industry. See Clause (126) of the Second Schedule to the Income Tax Ordinance, 2001. Also see Clauses (126A), (126B), (126C), (126D), (126E) and (126F) Part I of the Second Schedule for exemptions on profits and gains to different taxpayers operating industrial undertaking in prescribed areas. 18. e.g., an employee of Shaukat Khanum Memorial Hospital, if he is foreign nationality holder, non-resident, health professional and contract of his service is approved by the federal government; an employee, if not citizen of Pakistan and working as expert, advisor, consultant, or senior management staff in any institution run by Agha Khan Development Network Pakistan (AKDNP); Pakistani seafarer working on a foreign vessel or on Pakistan flag vessel for 183 days or more in a tax year; an employee of British Council, if he is not citizen of Pakistani; 19. At least 90% of its units are held by the public at the end of the relevant year and at least 90% of its income of the relevant year is distributed among the units-holders. 20. At least 90% of their incomes whether realized or unrealized are distributed among the unit or certificate holders. 21. Income should not be from trading activity and at least 90% of the profits of the year should be distributed among the certificate holders. 22. Agriculture income means rent or revenue derived from agricultural land situated in Pakistan. 23. For the purpose of this exemption, payer and payee must not associates, security issued outside Pakistan for raising loan, profit paid outside Pakistan and security is approved by FBR. See section 46 of the Income Tax Ordinance, 2001. 24. For the purpose of this exemption, the person is resident only due to his employment in Pakistan and he is resident in Pakistan for a period not more than three years. 25. Such income is exempt for two years starting from the year in which the person became resident if the income accrues or arises outside Pakistan and the person was non -resident of Pakistan in any of the four years immediately preceding the year in which he became again resident. 26. See Part III of the Second Schedule to the Income Tax Ordinance, 2001 that describes beneficiaries of reduced tax liability. 27. J. Matinez-Vazquez . Pakistan: A Preliminary Assessment of the Federal Taxes System. International Studies Program, Working Paper 06-24, December 2006, available at http://aysps.gsu.edu/isp/files/ispwp0624.pdf. 28. W. Thirsk. Tax Policy in Pakistan: An Assessment of Major Taxes and Options for Reform. International Studies Program, Working Paper 08-08, December, 2008, p.5, available at http://aysps.gsu.edu/isp/files/ispwp0808.pdf. 29. Tax avoidance comprises of activities which exploit the loopholes in the tax system but run counter to the purpose of law whereas tax evasion describes illegal activities that involve element of concealment. C. Fuest and N. Riedel. Tax evasion, tax avoidance and tax expenditures in developing countries: A review of the literature. Oxford University Centre for Business Taxation, June 2009. p. 3, available at http://www.sbs.ox.ac.uk/centres/tax/Documents/ reports/TaxEvasionReportDFIDFINAL1906.pdf. (Accessed on 10 February, 2013). 30. Matinez-Vazquez, note 27. p.40. 31. S. A. Zaidi. Pakistan's roller-Coaster economy: tax evasion stifles Growth. Carnegie Policy Brief, September, 2010, p.9, available at http://www.carnegieendowment.brg/files/pakistan_tax.pdf. 32. See Dawn "FBR Chief Issues Warning to Tax Evaders" 26 January, 2013, available at http://dawn.com/2013/01/26/fbr-chief-says-countrys-tax-system needs-reforms/. 33. The tax gap is commonly defined as the difference between the tax which would be raised under a hypothetical, perfect enforcement of tax laws and the actual tax payments. See Fuest and Riedel, note 29. p.15. 34. R. A. Ahmed and M. Rider. Pakistan's Tax Gap: Estimates by Tax Calculation and Methodology. Working Paper 08-11, December 2008, P.50. 35. Matinez-Vazquez, note 27. p.40. 36. See Chapter 14 "Energy" of Economic Survey of Pakistan 2011/12, available at hup://www.finance.gov.pk/survey/chapter_12/14-Energy.pdf. 37. See Annual Report 2011/12 of State Bank of Pakistan, available at http://www.sbp.org.pk/reports/annual/arFY12/Energy.pdf. 38. Matinez-Vazquez, note 27. p.28. 39. See, note 37. 40. J. English, EU Perspective on VAT Exemptions, Oxford University Centre for Business Taxation, WP 11/11, p. 13, available at http://www.sbs.ox.ac.uk/ centres/tax/papers/Documents/WP1111.pdf (accessed on 23 January 2013). 41. See Chapter 1 " Growth and Stabilization" of Economic Survey of Pakistan 2011/12, available at http://www.finance.gov.pk/survey/chapter_12/01- GrowthAndStabilization.pdf. 42. N. Iqbal and S. Nawaz, Fiscal Decentralization and Macroeconomic Stability: Theory and Evidence from Pakistan, Pakistan Institute of Development Economics, 2 December 2010, available at http://mpra.ub.uni‑ muenchen.de/27184/1/MPRA_paper_27184.pdf (accessed on 15 January 2013). Also see http://www.financekpp.gov.pk/FD/attachments/article/154/7th%2ONFC%20A WARD%202010.pdf. 43. A.S. Suleiman, The Administration and Problems of Value Added Tax in Nigeria, Finance and Accounting Research Monitor, Vol. 2, No. 2, September 2008, 44. H.P. Brixi, C.M.A. Valenduc and Z.L. Swift, Tax Expenditures Shedding Light on Government Spending through the Tax System, Lessons from Developed and Transition Economies, The World Bank Washington DC. ***